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Indonesia and Australia new free trade agreement will have an historic positive impact on both countries

Indonesia’s economy is expanding and its middle class is growing. The economic opportunities in improving our trading relationship with Indonesia are undeniable. Based on current trends:

The deal marks a new chapter in Australia’s partnership with one of our closest friends and neighbours. Indonesia offers significant economic opportunities right on our doorstep. Our neighbour has one of the fastest-growing economies in the world, averaging 5 per cent growth per year over the past two decades.

Most predictions have Indonesia on track to be the world’s fifth-largest economy by 2030. With a population of 270 million people – an expanding middle-class, the world’s third-largest democracy and most populous Muslim nation – our agreement with Indonesia helps build economic prosperity for both our nations and the region.

Indonesia economy in 2030 | PWC

However, IA-CEPA is more than just a trade agreement. It adds another string to our already strong economic, security and strategic partnerships with Indonesia. We had the breakthrough signing of a security treaty back in 1995, the bilateral Framework for Security Co-operation in 2005 and the Comprehensive Strategic Partnership on August 31 last year.

The economic scope and coverage of this new trade deal is comprehensive and should not be understated. The deal will ensure that 99 per cent of Australian goods (by value) exported to Indonesia will enter duty-free or under significantly improved preferential arrangements.

For Australian farmers, this agreement will provide better and more stable access to the Indonesian market for many products, including grains, meat, citrus and horticultural products.

Australia and Indonesia’s trade relationship has been described as “undercooked” by previous Australian ministers.

Australia’s two-way trade with Indonesia was worth $16.4 billion in 2016-17, making Indonesia only our 13th largest trade partner, despite its physical proximity.

Last year the two countries announced that under the agreement, Indonesia would reduce tariffs on imported Australian raw sugar and Australia would eliminate import duties on Indonesian herbicides and pesticides.

They failed, however, to pull off an overall free trade deal by the end of last year, despite repeated vows to do so by Mr Turnbull, Mr Joko, and other ministers.

Indonesia and Australia new free trade agreement | Reduced tariffs

Under the IA-CEPA, the tariff on frozen beef and sheep exports will be cut in half to 2.5 per cent, from the current 5 per cent. For dairy exports, there will be elimination or reduction of tariffs across a number of dairy lines. For citrus exports, there will be duty-free access for 10,000 tonnes of oranges in year one with 5 per cent annual growth in volume thereafter and duty access will also apply to 5000 tonnes of lemons in the first year.

For context, trade data over the decade to 2016 show that in an average year, 8000 tonnes of Australian citrus is exported to Indonesia. At current rates, this means the vast majority of these exports will now be duty-free.

Potato exports will also receive a tariff cut to 10 per cent (from 25 per cent) for 10,000 tonnes per year for five years with 2.5 per cent annual growth in volume thereafter, while carrot exports will also receive a tariff reduction from 25 per cent down to 10 per cent for 5000 tonnes per year.

It will also support Australian manufacturing in areas such as steel, copper and plastics.

Importantly, this economic partnership will establish better mechanisms for Australia to address technical market issues and non-tariff barriers – important for traders as traditional tariff barriers are progressively removed.

IA-CEPA also contains strong outcomes for Australian investors and service providers in areas such as vocational education and training, health, tourism and mining services. It also provides a set of high-quality rules governing the treatment of services and investment, as well as modern rules on digital trade.

Indonesia macro-economics projections | IMF

Mutual benefits

The mutual benefits that will be derived from this agreement are critical. Australia wants not only a stronger Australia but also a stronger Indonesia, knowing that economic growth enhances security and stability. By reducing trade barriers we can grow both of our economies and by encouraging trade and investment in areas of high potential for Indonesia we can build greater capacity for their continued successful development.

This agreement with Indonesia is the latest in a long list of free trade agreements signed by our government over the past five years. Agreements with China, South Korea, Japan and the recent Trans-Pacific Partnership now means total trade covered by free trade agreements has increased from 26 per cent to around 70 per cent.

These agreements have been a major reason why Australia continues to successfully navigate very challenging global trading conditions, which saw us record 12 monthly trade surpluses last year, and 22 in the last 24 months – 2018 was also the first calendar year since 1972 where every month was in surplus – the first time in 46 years.

This is in stark contrast to Labor who failed to start and conclude a free trade agreement while they were in government.

Trade continues to play a critical role in our continued economic success, directly employing one in five Australians and having contributed more than a quarter of Australia’s economic growth over the past five years.

And while this is significant, today is a day to celebrate the start of a new chapter in the Australia-Indonesia relationship, and one that will have long-lasting benefits by strengthening both our economies, our strategic ties, two-way investment flows and also ultimately boosting the prosperity of both our nations.